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Nitika, BBA LL.B, LPU University.
The following note sets forth the discussion/finding in relation to the power of an arbitrator to direct for the forensic audit of a company. At the outset, it is important to understand what is the meaning and ambit of Forensic Audit. Forensic Audit in broad terms means examination and evaluation of a firm’s or individual’s financial information for use as evidence in Court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.
Further, the forensic audit is one of the tools available to Securities and Exchange Board of India (SEBI) to prevent or take action for any fraud or prevention for any unfair trade practices.
In terms of Section 213 of the Companies Act, 2013, National Company Law Tribunal (NCLT) has the power to direct for the forensic audit of the company’s accounts, if an application is made to it supported by the grounds to suggest that the company is involved in fraudulent and unlawful activities.
The same power is exercised by the Courts and that can be best illustrated when in the year 2013 Bombay High Court in Tarun Amarchand Jain HUF & Anr. vs. Forward Markets Commission & 5 Ors., had directed the Forward Markets Commission (FMC) to appoint within two weeks an independent agency to carry out forensic audit on the much debated e-series contracts that was carried out by the scam-hit spot exchange NSEL.
Further, upon the order passed by the Tribunal or the Court, the Central Government, under Section 210 of the Companies Act, 2013 can order for an investigation and in that regard SEBI has the power to appoint a forensic auditor. Regulation 11 C of the SEBI Act, 1992 empowers SEBI to direct any person to investigate the affairs of intermediaries or brokers associated with the securities market whose transactions in securities market is being carried out in a manner detrimental to the interest of the investors or the securities market.
Forensic Audit vis-à-vis Arbitration:
Within the scheme of the Arbitration Act, 1996 an interim relief can be sought under Section 9 and Section 17 of the act.
Section 9 empowers the Court to grant interim relief or protection when an application is made to it like in cases of encashment of bank guarantees. Whereas, Section 17 gives power to Arbitral Tribunal to order interim measures unless the agreement prohibits such power.
In BC India Private Investors & Anr vs Lilliput Kidswear Limited & Ors, a petition under Section 9 of act was filed by the petitioner, praying the Court to appoint M/s. Deloitte Haskins to conduct a forensic investigation/audit of financial statements of Lilliput Kidswear Ltd. and to ensure that M/s. Deloitte Haskins receives full co-operation and access to all the books and records of the company as necessary. Thereupon, the Delhi High Court, exercising its power to grant interim relief under Section 9 of Arbitration and Conciliation Act, 1996 had ordered to conduct a Forensic Audit of financial statements of Lilliput Kidswear Limited.
It is to note that, after Arbitration and Conciliation (Amendment) Act, 2015, the power of Arbitral Tribunal to grant interim relief under Section 17 is at par with the power of Court under Section 9 in domestic Arbitration. Therefore, under Section 17 of the Act, an arbitrator would have the same power to grant an interim relief as to power of Court under Section 9 of Act.
Based on the reasoning provided, it is amply clear that arbitrator has power to direct for forensic audit of accounts of a company under Section 17 of Arbitration and Conciliation Act, 1996.
Cases where forensic audit is denied
In Mukund Subhash Karwa and Ors. Vs. Krishidhan Seeds Pvt. Ltd. and Ors., MANU/CL/0097/2014, which was a case of oppression and mismanagement, an award was passed by arbitrator and same was challenged under Section 34 of Arbitration Act, 1996 along with a prayer for conducting forensic audit of the respondent’s accounts. The Court set aside the award but held that question of forensic audit does not arise at that stage.
The Court had relied upon the judgment of the Bombay High Court in Rakesh Malhotra vs. Rajinder Kumar Malhotra MANU/MH/1309/2014 which discussed the arbitrariness of cases of oppression and mismanagement, and held that, “notwithstanding any agreement with respect to arbitration, the dispute under Section 397 and 398 of Act cannot be adjudicated by arbitration having regard to the nature of dispute.”
Further in Dunar Foods Limited and Ors. Vs. IL & FS Trust Co. Ltd. and Ors., MANU/CL/0015/2015, the Court held that;
“The forensic audit can be only ordered by the CLB and the same is not in domain or within the ambit of an Arbitrator. Only the CLB is empowered under Section 402 to direct the person guilty for diversion of funds etc. of Company to recover and restore the money to Company. In my view, an arbitrator is not capable to grant reliefs sought by petitioner in petition and the CLB is only competent forum to grant such reliefs in exercise of its rights and powers conferred upon it by virtue of provisions contained in Section 402 of the 1956 Act.”
Therefore based on the reasoning provided in the aforementioned cases, it can be concluded that the power of arbitrator to direct for a forensic audit is subject to the subject matter of the case being arbitrable or not.
Ashok Kumar Jain vs Securities And Exchange Board Of India, Appeal No. CIC/MP/A/2016/001266, Available at: http://nclt.gov.in/interim_orders/principal/23.09.2016/R.S.%20India%20Wind%20Energy%20Pvt.%20Ltd.%20%201.pdf.
 M/s. PTC Energy Ltd. V/s. R.S. India Wind Energy Pvr Ltd., C.P NO. 100(ND)/2015, Available at: http://nclt.gov.in/interim_orders/principal/23.09.2016/R.S.%20India%20Wind%20Energy%20Pvt.%20Ltd.%20%201.pdf.
 Writ Petition (LODG) No. 2340 of 2013, available at: http://bombayhighCourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvb3JpZ2luYWwvMjAxMy8mZm5hbWU9V1AyMzQwMTMyODEwMTMucGRmJnNtZmxhZz1OJnJqdWRkYXRlPSZ1cGxvYWRkdD0mc3Bhc3NwaHJhc2U9MTYwNzE3MjI1MTM1.
Livemint, Sebi seeks forensic audit of MCX’s trading software, 16 July 2017, Available at: http://www.livemint.com/Money/DI5uw74Q3wrjqeIMeN4CTL/Sebi-seeks-forensic-audit-of-MCXs-trading-software.html.